Bad Debts Continue to Weigh on Vietnam’s Growth

A lingering problem of non-performing loans continues to weigh on Vietnam’s economy this year. Reuters

Banks in Vietnam are struggling to boost lending, weighed down by a stubbornly high ratio of bad debt as well as weak demand, which may make it difficult to meet the economy’s growth target for the year.

Total outstanding loans rose by just 1.3% in the first five months of this year, well below the full-year target of 12%-14%, according to the State Bank of Vietnam, the country’s central bank.

“Banks are facing difficulties in finding businesses that are qualified for new loans,” Le Duc Tho, chief executive of Vietnam Joint Stock Commercial Bank for Industry and Trade, or Vietinbank (CTG.VH), told The Wall Street Journal.

Vietnam’s gross domestic product has grown by an average of 7.0% per year over the past decade, but in the past three years the average has slowed to 5.5%. This year’s GDP growth is expected to remain sluggish — the government is projecting 5.8% growth for the year, while the IMF says 5.5% — considering that Vietnam’s economy still relies heavily on loans for growth.

GDP rose 4.96% from a year earlier in the first quarter of 2014, down from 6.04% in the final quarter of 2013. Second-quarter GDP data is due this week.

Le Tham Duong, an economist with Ho Chi Minh City Banking University, said banks are reluctant to boost lending partly because of the high ratio of bad debt, which authorities have struggled to bring down.

“The process of cleaning up bad debt in the local financial system has been taking place too slowly,” Mr. Duong said.

Last July the central bank set up the Vietnam Asset Management Company to clean up non-performing loans in the banking system. Participating banks transfer their problem loans to the management company in return for a bond that can be used as repo collateral with the central bank.

Nguyen Huu Nghia, the central bank’s chief inspector, said in late May that the company has made slow progress in purchasing bad debt in part because of the halting recovery in the property market, as most of the bad loans are backed by real estate.

The ratio of bad debt in the local banking system was 9.7% of total loans at the end of February, up from 9.0% at the end of last year, state media reported earlier this month, citing the central bank.

Weak domestic demand also is keeping banks from extending loans, according to Can Van Luc, an economist with the Bank for Investment and Development of Vietnam (BID.VH). Ongoing tensions over the placement of a Chinese oil rig in contested waters in the South China Sea also could affect growth, he said.

“Business inventory levels remain high while investor confidence is low, making it difficult for banks to find businesses that are willing to take loans for business expansion, even though lending interest rates have fallen,” Mr. Luc said. “I think the government will likely fail to realize its growth target of 5.8% this year, and the most positive forecast now would be 5.4%.”

Vietinbank’s Mr. Tho forecast the total pool of outstanding loans would rise 2%-3% in the first half of the year, but he’s optimistic loan demand will pick up in the second half of the year, as it usually does.

“Business activity often gets more bustling and consumers tend to spend more toward the end of the year,” Mr. Tho said.

To get the economy rolling again, Mr. Tho said the government needs to consider cutting or freezing taxes for businesses, boost spending on infrastructure and seek ways to boost exports.

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